The US and China are engaged in a trade war nothing seems able to stop. It began with President Donald Trump’s threats against those who ‘steal from us’ (18 April 2017), to which President Xi Jinping replied: ‘No one should expect us to swallow anything that undermines our interests’ (1). A war of words soon led to punitive import tariffs: the US imposed 10-25% on a range of Chinese goods and China retaliated.

This began in the spring, dragged on through the summer and looks set to continue beyond this winter. It’s sometimes hard to distinguish real measures from sensational headlines. The US compiled a list of 5,745 Chinese products (including steel, aluminium, chemicals, textiles and electronics) with a value of $200bn (compared to total imports worth $505bn in 2017) that face a 10% duty until 1 January 2019, and 25% thereafter. There are several exemptions: smart watches, a sector in which Apple is market leader, are exempt, so Apple Watches, which are assembled in China, still enter the US duty-free. China retaliated with a list of 5,200 US products worth $60bn (total Chinese imports from the US in 2017 were $130bn).

Observers in Beijing and Hong Kong say ‘Beijing appears to have been caught off guard by Trump’s protectionist trade blitz ... it underestimated rising anti-China sentiment among the US elite’ (2). A former US political adviser said: ‘In trying to understand US policy, Beijing is over-reliant on Wall Street and the political elite [including Henry Kissinger, who helped open up relations], people with no influence on Trump.’

In trying to understand US policy, Beijing is over-reliant on Wall Street and the political elite, people with no influence on Trump
Former US adviser

Chinese negotiators, led by vice-premier Liu He, thought they had an agreement in May when they promised to buy more US energy and agricultural products, and give foreign — including US — companies the opportunity to become majority shareholders in Chinese firms. It was too little, too late. Bloomberg News reported: ‘Trump put a stop to [the] deal ... it crystallised a view in Beijing that Trump won’t quit until he thwarts China’s rise once and for all’ (3).

China’s elite shares this perception. The very muted debate in China centres on how to deal with the US. Shi Yinhong, director of the Centre for American Studies at Renmin University of China, believes this confrontation is ‘due in large part to China doing nothing for many years’ to reduce the trade imbalance, and counsels caution (4). That’s not the real issue according to the Communist Party’s paper, the Global Times: ‘The US won’t alter its intention to contain China’s rise in a short span of time or its urge to economically attack China. This [conflict] cannot be resolved simply by China’s efforts to keep a low profile and adjust its diplomatic and public opinion posturing’ (5). This alludes to Deng Xiaoping, the great moderniser, who advocated ‘hiding your talents and biding your time’, unlike President Xi, an assertive presence on the international stage who puts himself forward as leader of a ‘great country’ that deals with the US as an equal.

Talks have not completely broken down. In August a delegation visited Washington headed by the vice-minister for commerce, Wang Shouwen. No one was expecting a result, and there was none. Wang called the US a ‘trade bully’, hardly an invitation to dialogue.

‘We don’t want a trade war’

Current US aggression reminds Chinese presidential economic adviser Yifan Ding of Ronald Reagan’s offensive in the 1980s against Japan, then the world’s second-largest economy. The US made Japan yield by imposing tariffs (up to 100% on televisions and video recorders) and driving Japanese interest rates up to the point where Japan went into a depression from which it has never fully recovered. Such a scenario is unimaginable for China, Yifan said: ‘We don’t want a trade war, but we could cope if it came to it.’

Like Japan, China bet on exports as the engine of long-term growth. In the late 1970s, after Mao’s death, party leaders used the tools they had to end stagnation and introversion: an abundant supply of well-educated, disciplined and cheap labour; foreign capital looking for new markets; and international institutions seeking to end protectionism in old-world economies. ‘There was a time when China had doubts about economic globalisation and was not sure whether it should join the World Trade Organisation,’ Xi told the World Economic Forum in Davos in 2017. ‘But we came to the conclusion that integration into the global economy is a historical trend. To grow its economy, China must have the courage to swim in the vast ocean of the global market’ (6).

The Chinese economy soon outstripped France, the UK, Germany and Japan. Its GDP reached $11,200bn in 2016 (compared to the US’s $18,569bn). Especially in Washington, some think the Chinese economy is now well placed to overtake the US. On 18 August Trump tweeted: ‘All of the fools that are so focused on looking only at Russia should start also looking in another direction, China.’ He scored a point in August with the passage of his defence policy bill through Congress, where it was backed by the majority of Democrats. It states that ‘long-term strategic competition with China is a principal priority for the United States that requires the integration of multiple elements of national power, including diplomatic, economic, intelligence, law enforcement, and military elements’ (7). This is about more than trade.

The US is superior technologically, economically, diplomatically and militarily, and even though China is making rapid economic progress, its GDP per capita is less than 15% of that of the US. For now, the US is scaring itself over very little. But China’s trade surplus is at record levels: it has reached $375bn, equivalent to 47% of the US’s foreign trade receipts. On 1 March, Trump tweeted: ‘Our steel and aluminum industries (and many others) have been decimated by decades of unfair trade and bad policy with countries from around the world.’

Control of the supply chain

The effects of deindustrialisation, which began long before China entered world trade, are beyond question, as are the despair and anger of people in Europe, the US and Asia, now turning to authoritarian politicians and the far right. But it’s important to avoid misdiagnosis: China’s success is not due to unfair trade practices, though they do use these, as many appeals to the WTO attest. China, which boasts about its results (800 million Chinese raised out of extreme poverty), has used rules devised by more powerful countries, especially the US, to its own benefit. Nothing forced western leaders to open their economies to all comers, encourage industrial offshoring or remove the means of economic intervention under pressure from multinationals (which rushed into China). Even today, over 40% of ‘Chinese’ exports are made by foreign companies that control the whole supply chain from concept to sale and keep most of the profits. Apple’s iPhone is assembled in China: China retains just 3.8% of the added value, while 28.5% goes back to the US.

China’s leaders pressed foreign businesses to transfer technology and expertise, especially in aeronautics, electronics, cars, high-speed trains and nuclear energy. Multinationals accepted this in their eagerness to exploit a cheap workforce and ignore the environmental consequences of their activities. It’s a pity China was not as zealous in protecting its population against inequality and pollution; but that is not likely to feature on Trump’s list of grievances.

What Trump and his friends regret is that ‘China’s Communist Party hasn’t been tamed by commerce. The Party-State still has firm control over the commanding heights of China’s economy,’ according to Brad W Setser, a senior fellow for international economics at the Council on Foreign Relations (8). The giants of capitalism are not able to do whatever they like in China, not only in traditional industries such as steelmaking, but in the online businesses of Google, Amazon and Facebook. Only Apple has worked out a solution. China has developed its own technology companies — Alibaba, Tencent, Weibo, WeChat — and China’s leaders use them to censor their opponents; the metadata of the 57.7% of Chinese with online access (802m people) is mostly inaccessible to GAFA (Google, Amazon, Facebook, Apple), so China is a rare place outside their influence. This is why Silicon Valley, a Democrat stronghold, takes the same view as Trump’s heartlands and big steel companies, which have ‘deep ties to [Trump] administration officials’, including US trade representative Robert Lighthizer, according to a New York Times investigation (9). These companies are more concerned with defending shareholder interests than workers, even if some workers might benefit from protectionist tariffs.

The free trade option, almost universally praised, including by Xi, has left millions behind and caused unprecedented environmental damage worldwide. Trump protectionism, entirely focused on private profit, will do little to help most US citizens. So a trade war is likely to produce few, if any, winners.

The director of the National Economic Council, Lawrence Kudlow, is certain that China will ultimately bend to Trump’s will. He believes the Chinese economy is ‘heading south’. ‘Retail sales [and] business investment are collapsing in China, according to the numbers,’ he claimed during a cabinet meeting filmed with presidential approval (10). There is no corroborating data, and China’s imports have continued to grow, by 27.3% in the year from July 2017, which suggests sustained activity; its exports are increasing at a still respectable 12.2% a year.

The clash will not be painless

The clash will not be painless for China; the US takes 20% of its exports. Any drastic reduction would mean lower production in textiles and electronics, and in sectors with overcapacity, such as steel and chemicals. That would accelerate restructuring, perhaps causing social mobilisation, with unpredictable consequences. In August prime minister Li Keqiang promised $100bn of aid for companies hit by export restrictions. More than the direct impact on growth — which US studies suggest would only be a reduction of 0.1-0.2% — it’s the conjunction of industrial restructuring and the move to a higher-skilled economy planned by the government that could be volatile.

China’s second-quarter growth rate this year was 6.7%, 0.2% above the official forecast. This politically significant figure shows the growth required to absorb new entrants to the labour market and avoid social conflict. Exports have long since ceased to be the engine of growth, which is now domestic consumption and investment (43.4% and 40% of GDP). If the economy veers off course, the president can reset it, though he could not repeat the trick used during the 2007-08 crisis, when his predecessor unlocked vast funds, causing huge waste and disturbing levels of debt that China’s present leaders are still trying to tame. But he does have room for manoeuvre. Unlike Japan in the 1980s, ‘we have a market of 1.4bn people that Trump and his advisers would have trouble destroying,’ a Chinese economist said.

China is the biggest market for American computer chips. Soon Chinese companies will be producing them... and at a cheaper price
Yifang Ding

Xi also has the Made in China 2025 programme, launched three years ago to make industry more innovative and achieve autonomy in IT, robotics, aeronautics and space, marine engineering, electric vehicles, biomedicine, new materials and energy. Both state and private sector R&D money has followed, and is now 2.3% of GDP. The government hoped to buy up foreign companies as a shortcut to acquiring new technologies, but the US has vetoed this and some EU governments, including Germany, have imposed restrictions. The Chinese government has enough financial reserves to extend its investment within China. Yifan said: ‘The US embargo on electronic products has set our leaders thinking, because China is the biggest market for American computer chips. Soon, Chinese companies will be producing them... and at a cheaper price.’

The Chinese leadership has other objectives besides reinvigorating the economy: gaining freedom of movement and attracting international attention, especially in developing countries. Trump’s use of US-licensed technologies and ‘the exorbitant privilege of the dollar’, as French president Valéry Giscard d’Estaing put it in 1964, to sanction companies that work with Iran has finally convinced China’s leaders to free themselves from the dependency trap. China will continue to trade with Iran, using the yuan within the framework of bilateral financial agreements.

‘That would have been impossible without the policy of internationalising our currency,’ according to a Beijing economist speaking anonymously. But China’s major banks still trade largely in dollars and products exported to countries on the US’s proscribed list must contain no American component to avoid Trump’s sanctions. Zhongxing Telecommunication Equipment (ZTE) had to cease trading with North Korea and Iran and is now closely monitored by the US. Nationalists within the Chinese government find this restricted sovereignty hard to swallow.

Self-sufficiency drive

The Made in China 2025 programme is highly likely to be stepped up, though it appears on the list of US grievances. Elizabeth C Economy, Director for Asian Studies at the Council on Foreign Relations in New York, describes it as a ‘self-sufficiency drive’ and part of ‘Xi’s revolution ... a values-based challenge to the international norms promoted by the United States’ (11). Once again, this is more than a trade war. Wang Yong, director of the Centre for International Economic Policy at Beijing University, challenges Economy’s view: ‘The argument which holds that China’s development model and philosophy aim to challenge the US makes little sense. China is not advocating the spread of its ideology abroad and emphasises everyone’s right to follow their own development path.’

China has no messianic ambition and its political model is not attractive. That doesn’t mean it abides by the rules laid down by the US, World Bank and IMF after the second world war. President Xi does not hide the fact that ‘we want to take an active part in leading the reform of the global governance system’, as he told the Central Conference on Work Relating to Foreign Affairs in June (12).

To do this, China is linking with partners, especially its neighbours. Most of them fear China’s power and economic appetite but need access to its markets; 43% of trade in the region is between Asian nations (13). Trump’s zeal has further encouraged this by upsetting traditional allies Japan and South Korea in applying tariffs to them, too. China may seize this opportunity to relaunch the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement it devised in response to Barack Obama’s Trans-Pacific Partnership (TPP), an earlier attempt to contain China that Trump ditched. Besides the ASEAN countries (14), the RCEP includes Japan, Australia, New Zealand, India and South Korea.

Shiro Armstrong, director of the Australia-Japan Research Centre at the Australian National University, sees the RCEP as ‘a natural opportunity to build an Asian coalition [...] The group includes some of the largest and most dynamic economies in the world.’ He cited an Australian study which found that ‘even if tariffs were raised by 15 percentage points globally (similar to the Great Depression), RCEP countries could all continue their economic expansion if they abolished tariffs as a group’ (15). It’s not certain that all of them will be prepared to do so. Australia, for example, has just expelled ZTE, which had been about to help install the country’s 5G network. But discussions are ongoing: China and Japan are back on speaking terms; South Korea is looking for common ground for negotiations with the North; India is attempting a balancing act between China and the US.

Chinese companies have begun offshoring to take advantage of even lower wage economies in Bangladesh, Vietnam and South Africa, and to circumvent the embargo and punitive tariffs. Goods produced by Chinese companies abroad and marked ‘Made in Bangladesh’ escape US taxes.

The new Silk Roads, overland routes to Europe via the Central Asian republics and Russia, or by sea via Africa, should also create opportunities, especially for infrastructure projects. President Xi has adroitly managed to turn these routes into a multilateral project by setting up the Asian Infrastructure Investment Bank (AIIB). Its 57 founding members include Germany, the UK, France, India and South Korea. What China fears most is becoming isolated in a standoff with the US, as the USSR did.

Patriotism isn’t enough

For now, it is using trade reprisals against US products to show it will not cave in. In the US these have impacted farmers, whose sales have declined, especially in cereals, pork and beef. Trump has promised them $12bn of aid, but this is being drip-fed and concern is growing. ‘Farmers’, agriculture secretary Sonny Perdue said, ‘cannot pay their bills with simple patriotism’ (16). China has opportunely abolished import tariffs on soybeans from Bangladesh, India and South Korea and sought alternatives in Brazil and Australia. A lost customer can be tough to win back.

We came to the conclusion that integration into the global economy is a historical trend. To grow its economy, China must have the courage to swim in the vast ocean of the global market
Xi Jinping

Trump’s anti-Chinese war has been broadly welcomed at home. Many in the administration think that China will yield, like Mexico, which agreed to trade restrictions and a minimum wage of $16 an hour in some of its car plants (17). No previous free trade agreement ever included such a social clause, even if its application is limited.

It’s different for giant retailers such as Walmart, which gets 80% of its goods from Asia, and for some industrial companies. Business representatives told federal trade officials that ‘the duties would wreak financial havoc on their industries and harm US consumers’ (18). This is the classic argument against protectionism, which doesn’t make it untrue: to be effective, these protectionist measures would need a substantial increase in Americans’ buying power — not on the agenda — and, even less likely, the return of industries to US soil. According to Bloomberg, the US textile and garment sectors are already looking to other countries, including Vietnam and Cambodia. (19)Some industries, such as those that require specialist steels, have already secured exemptions and can import more freely.

In the US and China the big losers will be ordinary people. Trump hopes to shake China’s resolve, while Xi believes that after the US midterm elections in November, the US will return to the negotiating table. However, An Gang, a researcher at the Pangoal Institution, a Chinese thinktank, thinks the confrontation has gone far beyond trade: ‘The disagreement now has military and strategic implications.’ China’s rulers fear the problems could have repercussions in the South China Sea and Taiwan, where tensions have never been greater.

The current globalised, specialised production model in China and the West is certainly in poor shape. Yet no alternative has been put forward either by the followers of Chinese style ‘communism’ or by worshippers of US-style capitalism, even in its protectionist remix. That leaves the door open for all kinds of extreme proposals.